Foreclosure laws are concerned with the legal process by which a lender seeks to recover the amount owing on a defaulted debt by seizing and selling the mortgaged property.
Default is typically caused when a borrower fails to make a certain amount of monthly payments, but it can also occur when the borrower fails to meet other requirements in the mortgage instrument.
Graana.com, Pakistan’s smartest property portal, takes a look at what foreclosure is and what laws deal with the foreclosure of assets.
Types of Foreclosure
Different types of foreclosure in Pakistan are as follows:
Judicial foreclosures are also known as foreclosure by judicial proceedings. Under this type, if the bank decides to go forward with the sale of the mortgaged property, the foreclosure is done under the supervision of a business court.
The proceedings coming from the foreclosure are first used to satisfy the mortgage, then the lien holders (loan providers) and the remaining proceeds are given to the borrower.
Non-judicial foreclosures are colloquially known as “foreclosure by the power of sale”.
This type of foreclosure is applicable only in the case where the deed between the provider and borrower states that the provider holds the power of sale of the asset.
Furthermore, in a non-judicial foreclosure, the need for oversight by a business court is eliminated.
Strict foreclosures are the least common type of foreclosure. The provider files a report in a court of business, and if it is in the favour of the provider (mortgagee), the defaulter has to pay in a specified period of time.
In case the defaulter fails to pay for the asset, the mortgagee gains the title of the asset along with the right to sell it.
Foreclosure Laws in Pakistan
In Pakistan, the right to foreclosure is defined under the heading of mortgagee rights and obligations. Section 77 of the Transfer of Property Act 1882 states that “the mortgagee has the right to obtain (a decree) from the court, at any time after the mortgage money has become due to him and before a decree for the redemption of the mortgaged property or the mortgage money has been paid or deposited.”
Furthermore, “a decree that the mortgagor shall be absolutely debarred of his right to redeem the property or a decree that the property be sold is known as a suit for sale. Sections 67 to 77 address the mortgagee’s rights and obligations, and sections 60 to 66 address the mortgagor’s rights and liabilities.
The mortgagee’s legal remedies are as follows:
- On the covenant
- For sale
- To avoid foreclosure
Documents Needed for Foreclosure
Documents required at the time of foreclosure are given below:
- The mortgage deed along with other security documents
- A personal guarantee along with charge documents
- Finance agreement with charge documents
- The statement of account was duly filled as per the banker’s book of Evidence Act 1891
The charge filed by the mortgagee must contain the following:
- The amount of finance availed by the mortgagor
- The amount returned by the mortgagor
- The amount of finance and other amounts payable by the defendant
A Timeline of Changes Made in the Foreclosure Laws
The government’s efforts to offer affordable homes for the great majority of Pakistan’s low-income groups continue to be hampered by the country’s inability to obtain mortgage financing.
According to a State Bank assessment, Pakistan has an estimated annual need of approximately 700,000 dwellings, with the market meeting barely half of that demand – resulting in a housing deficit of around 10 million housing units.
This scarcity of mortgage finance facilities is essentially the result of Pakistan’s inadequate foreclosure regulations — to put it succinctly.
In addition, President Arif Alvi issued an act aimed at removing the obstacles that have long hampered mortgage finance in the country.
The bill, titled “An ordinance to provide for the effective recovery of mortgage-backed investments by financial institutions” (Ordinance No. IX of 2019), was one of 11 passed by the National Assembly in November 2019.
The act seeks to secure the rapid recovery of ‘mortgage-backed security’ or financial support offered by the country’s financial institutions
. Its preamble declares that it was created “for the objectives of assisting financial institutions in awarding those securities” and that it “ultimately works as a catalyst for addressing the housing needs of the people of Pakistan”.
Recovery Without Court’s Oversight
Previously, one of the greatest impediments to mortgage lending in Pakistan was the banks’ inability to seek non-judicial foreclosures. Section 15 of the Financial Institution Recovery Ordinance of 2001 included this option.
However, in a 2014 decision named ‘National Bank of Pakistan vs. Saif Textile Mills’, the Supreme Court ruled that the clause violated the borrower’s constitutional right to ”due process of law”.
Furthermore, Section 3 of the mortgage-backed securities ordinance reestablished the legal application of the aforementioned non-judicial foreclosure process — provided it is carried out in compliance with the code’s other requirements.
This provision specifies that every legal claim (including those created by the mortgage) related to a property, created in favour of a “secured creditor” (a financial institution), can be enforced ”without the participation of any court”.
In other words, a bank operating under the terms of this ordinance is now permitted to collect the mortgage amount or appropriate interest without the need for the assistance of a court or tribunal.
Foreclosure Laws on Availing State’s Assistance
The new code not only allows banks to take custody of properties in order to recover their debts, but it also allows them to contact the state in order to get control of these assets.
In addition, to pursue such issues practically, the bank or financial institution participating in the action is required (by ordinance) to make a formal request to the government authority requesting that it take custody of any secured asset or documents relating to it. The state authority will then take the appropriate steps to ensure that such a request is met.
Furthermore, the ordinance states that the appropriate authority will be announced by the government through the rules created under this ordinance. It also states that no action taken by state officials in accordance with these portions of the law can be challenged “in any court of law or before any authority”.
In retrospect, and in light of the socio-economic developments that have occurred in the short months ever since its announcement, this ordinance is a long-awaited law for Pakistan’s banking sector – a tangible guarantee, in effect, of the success of mortgage lending in the country.
The legislation amending Pakistan’s foreclosure laws is also intended to facilitate the growth of former Prime Minister Imran Khan’s Naya Pakistan Homes Programme (NPHP), which aims to provide cheap housing to lower-income people and is funded primarily by the private sector.
Overall, the far-reaching influence of this law will undoubtedly aid in altering the balance of the country’s housing market.
To read more about real estate laws such as rental laws in Sindh, visit the Graana blog.